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Working in Retirement? Here's Why That's Great…and Why It's Really Not

Working in retirement isn’t the traditional path, but it’s gaining popularity as a financial strategy for underfunded seniors. According to a report by Transamerica Center for Retirement Studies, nearly 60% of employed workers plan on holding at least a part-time job in retirement.

Advantages of working in retirement

There are clear financial advantages to working in retirement. Continuing to collect a paycheck makes you less reliant on retirement account withdrawals to pay the bills. Your money stays invested longer, which raises your wealth potential. Even better, you might continue to fund that retirement account, further boosting the longevity of your savings.

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Plus, if working in retirement allows you to delay Social Security, you’ll earn a higher federal retirement benefit later. You can collect Social Security at age 62, but your benefit rises for each month you hold off. Postponing your benefits until your full retirement age (FRA) can increase your Social Security income by up to 42%.

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Disadvantages of working in retirement

Now, for the bad news. Before you commit to working in retirement, consider three drawbacks: the life-quality trade-off required, the possibility that your plan won’t heal your finances, and the potential for Social Security penalties.

Life-quality trade-off. Working consumes time and energy that detracts from your family and personal time. This may be hard to manage, particularly if your spouse and circle of friends are enjoying a more traditional, work-free retirement.

There’s also the risk you’ll skip over the “fun” retirement years entirely. That happens when you work until you can’t anymore. Then you transition right into a sedentary life.

Unreliable solution. The life-quality trade-off might be acceptable temporarily — if working were a failsafe financial solution. Unfortunately, it’s not. Many retirees report being forced out of the workforce for circumstances outside their control.

Declining health can be one cause. Changes at work can be another. Corporate restructuring and evolution of job responsibilities often make seniors easy targets for downsizing.

You might regret giving up your free time to work, only to be forced into a lifestyle downgrade anyway. After all, a lifestyle downgrade earlier may have allowed for a more traditional retirement from the start.

Potential hit to your Social Security income. If you work while collecting Social Security before your FRA, you are subject to earnings caps. Exceed those caps and your Social Security benefit will take a hit.

There are two income caps, and they change every year. In 2022, you can’t earn more than $19,560 in the years before your FRA. For every $2 your income exceeds that limit, your Social Security benefit dips by $1. In the year you reach FRA, you can’t earn more than $51,960. Every $3 you earn above that threshold prompts a $1 decline in your Social Security benefit. Later, your monthly benefit will adjust higher to compensate in part for the lost benefits, but there’s no guarantee that you’ll get all of them back.

Working isn’t the only answer

Working in retirement can shore up your finances, but there are trade-offs. Consider carefully how you want to spend your senior years. If working isn’t near the top of your list, brainstorm other solutions like downsizing or relocating to lower your living expenses

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